S-1/A 1 file001.htm AMENDMENT NO. 1 TO FORM S-1

As filed with the Securities and Exchange Commission on June 9, 2004.

Registration No. 333-114818

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT No. 1
TO
FORM S-1

REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

PRIMUS GUARANTY, LTD.

(Exact name of registrant as specified in its charter)


Bermuda 6199 N/A
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. employer
Identification Number)

Primus Guaranty, Ltd.
Clarendon House, 2 Church Street
Hamilton HM 11, Bermuda
441-296-0519

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Zachary Snow, Esq.
Primus Asset Management, Inc.
360 Madison Avenue, 23rd Floor
New York, New York 10017
212-697-2227
Fax: 212-697-3731

(Name, address, including zip code, and telephone number, including area code, of agent for service)

copies to:


Stephen P. Farrell, Esq. Richard A. Drucker, Esq.
Morgan, Lewis & Bockius LLP Davis Polk & Wardwell
101 Park Avenue 450 Lexington Avenue
New York, New York 10178 New York, New York 10017
212-309-6000 212-450-4000
Fax: 212-309-6001 Fax: 212-450-3800

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the Securities Act), check the following box: [ ]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated June 9, 2004

PROSPECTUS

                                Shares

Primus Guaranty, Ltd.

Common Shares

This is our initial public offering of common shares. We are offering                   common shares and the selling shareholders identified in this prospectus are offering                    common shares. No public market currently exists for our common shares. We will not receive any proceeds from the sale of the common shares offered by the selling shareholders.

We have applied to have our common shares listed on the New York Stock Exchange under the symbol "PRS". We currently estimate that the initial public offering price will be between $     and $     per share.

Investing in the shares involves risks. Risk Factors begin on page 8.


  Per Share Total
Public offering price $                  $                 
Underwriting discount $   $  
Proceeds to Primus Guaranty, Ltd. (before expenses) $   $  
Proceeds to selling shareholders (before expenses) $   $  

The selling shareholders have granted the underwriters a 30-day option to purchase up to an aggregate of                    additional common shares on the same terms and conditions as set forth above to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about                        , 2004.

LEHMAN BROTHERS  MORGAN STANLEY

CREDIT SUISSE FIRST BOSTON

UBS INVESTMENT BANK

  WILLIAM BLAIR & COMPANY

KEEFE, BRUYETTE & WOODS, INC.

                    , 2004




TABLE OF CONTENTS

    


  Page
Prospectus Summary   1  
Risk Factors   8  
Special Note Regarding Forward-Looking Statements   18  
Use Of Proceeds   19  
Dividend Policy   19  
Capitalization   20  
Dilution   21  
Selected Historical Consolidated Financial Data   22  
Management's Discussion and Analysis of Financial Condition and Results of Operations   25  
Industry Overview   42  
Business   46  
Management   58  
Principal and Selling Shareholders   69  
Certain Relationships and Related Transactions   71  
Description of Share Capital   73  
Shares Eligible for Future Sale   84  
Tax Considerations   86  
Underwriting   94  
Notice to Canadian Investors   98  
Legal Matters   100  
Experts   100  
Where You Can Find Additional Information   100  
Index to Consolidated Financial Statements   F-1  

Through and including                      , 2004 (the 25th day after the date of this prospectus), all dealers effecting transactions in our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotment or subscriptions.

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PROSPECTUS SUMMARY

This summary does not contain all of the information that you should consider before investing in our common shares. You should read the entire prospectus carefully, including the "Risk Factors" section beginning on page 8 and our consolidated financial statements and related notes to these financial statements beginning on page F-1 before making an investment decision. Unless otherwise indicated or the context requires otherwise, references in this prospectus to "we", "us" or "our" refer to the consolidated operations of Primus Guaranty, Ltd. and references by a company name refer solely to such company. Unless otherwise indicated, all information in this prospectus (1) reflects the automatic conversion upon consummation of this offering of all outstanding Series A convertible voting preferred shares into an aggregate of 29,583,148 common shares, (2) reflects a one for 8.1 reverse share split of our common shares to be effected immediately prior to the completion of this offering and (3) assumes no exercise of the underwriters' over-allotment option.

Our Company

Overview

Our principal business is selling credit protection under which we assume the risk of default on investment grade credit obligations. The protection we sell takes the form of a credit default swap, or credit swap. In exchange for a fixed quarterly premium we agree, upon a default or other credit event (e.g., bankruptcy, moratorium or repudiation) affecting a designated issuer, which we refer to as a Reference Entity, to pay our customer, which we refer to as a counterparty, an agreed amount. We pay this agreed amount, which we call a notional amount, upon our counterparty's delivery to us of the Reference Entity's debt obligation. Credit swaps are an efficient and standardized mechanism to reduce credit risk exposure arising from the ownership of financial obligations such as bonds, loans and receivables. See "Industry Overview—Overview of Credit Swaps" for additional information regarding credit swaps. The primary purchasers of credit swaps are commercial and investment banks as well as credit portfolio managers, insurance companies and other financial institutions.

Primus Financial, our principal subsidiary, has the highest counterparty credit ratings offered by Standard & Poor's Rating Services (AAA), or S&P, and Moody's Investors Service, Inc. (Aaa), or Moody's, and is managed by an experienced team of professionals who have expertise in credit analysis, trading, risk management and market analysis. At March 31, 2004, we had relationships with 38 counterparties to which we were prepared to sell credit protection. At March 31, 2004, Primus Financial had sold credit protection with respect to $8.1 billion (in notional amount) of referenced obligations representing 427 Reference Entities spread across 39 industries and 22 countries. Our credit swap portfolio had a weighted average credit rating of A ("strong"; sixth of 18 categories) by S&P and A3 ("good financial security"; seventh of 21 categories) by Moody's and had an average maturity of 2.6 years at March 31, 2004.

We were capitalized in March 2002 and sold our first credit swaps in June 2002.

Growth In The Credit Swap Market

The credit swap market has been transformed from a small, niche segment of the capital markets to a global market that is rapidly growing with diverse product applications and a wide range of participants. The notional amount referenced by outstanding credit swaps (excluding asset swaps) is estimated by the British Bankers Association, a third-party research firm, and the International Swaps and Derivatives Association, Inc., or ISDA, to have grown from $180.0 billion at December 31, 1997, to $3.6 trillion at December 31, 2003. There are approximately 1,200 Reference Entities that have investment grade credit ratings by both S&P and Moody's. We believe that the credit swap market will continue to grow as commercial and investment banks and other credit portfolio managers more actively manage their credit and investment portfolios.

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Competitive Strengths

We believe we are well-positioned to continue to compete effectively in the credit swap market. The following are our competitive strengths:

Highest Available Counterparty Credit Ratings.   Primus Financial has a AAA ("extremely strong") counterparty credit rating from S&P and a Aaa ("exceptional") counterparty credit rating from Moody's, the highest of their eighteen and twenty-one rating levels, respectively. These ratings are based on an analysis of the risks of Primus Financial's business of selling credit swaps in relation to its capital.

Experienced Management Team with Strong Market Relationships.   Our management team has extensive industry experience with strong and long-standing market relationships with participants and counterparties in the credit swap market.

Disciplined Underwriting and Risk Management.   We underwrite credit risks using a rigorous credit analysis that allows us to sell credit protection on Reference Entities that we believe offer attractive risk-adjusted returns.

Efficient and Scalable Operations.   We believe that our scalable operations enable us to leverage our management's expertise and provide opportunities to realize increased profitability as our business grows and matures.

Our competitive strengths are more fully discussed on pages 46 through 47.

Business Strategy

The major elements of our strategy are:

Continue to Expand our Credit Swap Business.    We intend to leverage our competitive strengths to continue to build a diversified credit risk portfolio and increase and efficiently utilize our capital resources to support our growth.

Maintain Primus Financial's AAA/Aaa Ratings.    We believe that having the highest ratings from S&P and Moody's gives Primus Financial the ability to attract large and growing amounts of business with a wide range of counterparties and the ability to select Reference Entities along the full spectrum of investment grade credits.

Pursue Opportunities in Complementary Businesses.    We intend to diversify our sources of revenue by expanding into complementary businesses.

The proceeds from this offering will facilitate executing our business strategy by increasing our capital resources and enabling us to expand our business, maintain our highest credit ratings and pursue opportunities in complementary businesses. In particular, we will provide up to $60.0 million of proceeds received from this offering to Primus Financial to enhance its capital and enable it to sell additional swaps consistent with the requirements of S&P and Moody's.

Our business strategy is more fully discussed on page 47.

Corporate Structure

We are a Bermuda company. Primus Financial is our principal subsidiary and a AAA/Aaa rated seller of credit swaps. Primus Asset Management, another of our subsidiaries, manages Primus Financial's credit swap business and intends to manage the credit swap portfolios of third parties. We also have a Bermuda registered financial guaranty insurance company, Primus Re, that offers credit insurance protection to companies that prefer insurance products to credit swaps. See "Business—Corporate Structure" for additional information regarding our structure. We are currently owned primarily by XL Insurance (Bermuda) Ltd, a subsidiary of XL Capital Ltd, Transamerica Life Insurance Company, an indirect wholly-owned subsidiary of AEGON, N.V., a Netherlands based holding company, Pacific Corporate Group/CalPERS, Radian Group Inc. and our management. Our institutional shareholders have nominated individuals to serve on our board of directors and these directors provide us valuable assistance and expertise in conducting and expanding our business.

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Our registered office is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda and our telephone number is 441-296-0519. The offices of our principal operating subsidiary, Primus Financial, are located at 360 Madison Avenue, 23rd Floor, New York, New York 10017 and its telephone number is 212-697-2227.

Potential Conflicts

Some of our principal shareholders sell products and offer services that compete with ours. In addition, they may hire us to provide credit risk advisory and asset management services. Our board of directors monitors transactions with our principal shareholders and their affiliates to ensure that such transactions are conducted on an arm's-length basis. Additionally, our directors customarily recuse themselves when transactions with our shareholders with whom they are associated are discussed or approved by the board of directors. For more information concerning the potential conflicts that may arise, please see the section "Business—Potential Conflicts With Certain Shareholders".

Notice to United States Investors—Tax Consequences of Owning Our Shares

We and our subsidiary, Primus Barbados, are likely to be and remain passive foreign investment companies, or PFICs, for United States federal income tax purposes. There are potentially adverse United States federal income tax consequences of investing in a PFIC for a shareholder who is a United States taxpayer. These consequences include the following:

•  if a shareholder makes a qualified electing fund election, or QEF election, with respect to Primus Guaranty and Primus Barbados, the shareholder will have to include annually in his or her taxable income an amount reflecting an allocable share of the income of Primus Guaranty or Primus Barbados, regardless of whether dividends are paid by Primus Guaranty to the shareholder;
•  if a shareholder makes a mark-to-market election with respect to Primus Guaranty, the shareholder will have to include annually in his or her taxable income an amount reflecting any year-end increases in the price of our common shares, regardless of whether dividends are paid by Primus Guaranty to the shareholder; it is unclear how such an election would affect the shareholder with respect to Primus Barbados; and
•  if a shareholder does not make a QEF election or a mark-to-market election, he or she may incur significant additional United States federal income taxes with respect to dividends on, or gain from, the sale or other disposition of, our shares, or with respect to dividends from Primus Barbados to us, or with respect to our gain on any sale or other disposition of Primus Barbados shares.

Please review carefully "Risk Factors—Risks Related to Taxation" and "Tax Considerations—Taxation of Shareholders—United States Holders—Passive Foreign Investment Companies".

Prospective investors are urged to consult their own tax advisors concerning their particular circumstances and the United States federal, state, local, and non-United States tax consequences to them of owning and disposing of our common shares. In particular, prospective United States holders of our common shares are urged to consult with their tax advisors as to the tax consequences of holding shares of PFICs directly and indirectly (in the case of Primus Barbados) of PFICs and the possible advisability of electing to have each of Primus Guaranty and Primus Barbados treated as a "qualified electing fund", or QEF, or of making a mark-to-market election with respect to Primus Guaranty.

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If

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anyone provides you with different or insufficient information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

The Offering

Common shares offered by Primus     Guaranty                shares
Common shares offered by selling     shareholders                shares
Common shares to be outstanding after     this offering                shares
Use of proceeds We intend to use a portion of the net proceeds from this offering to provide up to $60.0 million in additional capital to Primus Financial to expand its capacity to enter into credit swaps and to use the remainder as working capital and for general corporate purposes, including expanding our credit swap business and pursuing opportunities in complementary businesses. We will not receive any of the proceeds from the sale of shares by the selling shareholders.
Dividend policy We do not intend to pay dividends on our common shares for the foreseeable future. We plan to retain our earnings for use in the operation of our business and to fund future growth.
Proposed New York Stock Exchange     symbol "PRS"

Except as otherwise indicated, the number of common shares stated to be outstanding after this offering gives effect to the common shares being sold by us in this offering, a one for 8.1 reverse share split that we intend to effect immediately prior to the completion of this offering and the automatic conversion of all outstanding shares of our convertible preferred shares into an aggregate of 29,583,148 common shares upon completion of this offering. Such number of common shares excludes:

•  525,295 common shares issuable upon exercise of options outstanding as of May 31, 2004, under our 2002 stock incentive plan, with a weighted average exercise price of $         per share;
•  1,397,280 common shares issuable upon exercise of warrants outstanding as of May 31, 2004, with an exercise price of $5.25 per share and an expiration date of March 14, 2007; and
•              additional common shares reserved for issuance under our employee incentive plans.

You should read the discussion under "Management—Share Option and Other Benefit Plans" for additional information about our employee option plan.

There has been no public market for our common shares prior to this offering. We and the underwriters will negotiate the initial public offering price at which our common shares will be sold in this offering. Factors that we and the underwriters will consider include: prevailing conditions in the securities markets at the time of this offering; the history of and prospects for our industry; an assessment of our management; our present operations; our historical results of operations; the trend of our revenues and earnings; our earnings prospects; recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and any other relevant factors.

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We cannot be sure that the initial public offering price will correspond to the price at which the common shares will trade in the public market following this offering or that an active trading market for the common shares will develop and continue after this offering.

Summary Historical Financial Data

The following tables summarize our historical financial and operating data as of the dates or for the periods indicated. We derived the summary for each of the three years ended December 31, 2003, 2002 and 2001 from our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or United States GAAP, and audited by Ernst & Young LLP. The statement of operations data for the three months ended March 31, 2004 and 2003, and the balance sheet data as of March 31, 2004, are derived from, and are qualified by reference to, our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair presentation of our financial position and results of operations for these periods. The results of operations for prior accounting periods are not necessarily indicative of the results to be expected for any future accounting periods. Until March 2002, we were in a development stage. We were capitalized on March 14, 2002 and began to sell credit swaps in June 2002. You should read this summary in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes appearing elsewhere in this prospectus.


  Three Months Ended
March 31,
Year Ended
December 31,
($ in thousands, except per share data) 2004 2003 2003 2002 2001
  (unaudited)
Consolidated Statement of Operations:                  
Revenues:                  
Net premiums earned $ 9,644   $ 8,921   $ 38,516   $ 11,768   $  
Net realized gains on credit swaps   1,582     1,556     17,629     2,843      
Net unrealized gains (losses) on credit swaps   (14,474   1,145     46,739     (213    
Interest income earned   652     672     2,617     1,610     2  
Other income   (34   27     107     12      
Total revenues $ (2,630 $ 12,321   $ 105,608   $ 16,020   $ 2  
Expenses:                  
Employee compensation $ 3,423   $ 2,417   $ 11,701   $ 6,428   $  
Other expenses   1,682     3,008     13,754     8,115      
Development stage expenses               4,292     2,789  
Total expenses $ 5,105   $ 5,425   $ 25,455   $ 18,835   $ 2,789  
Distributions on preferred securities of subsidiary $ (542 $ (221 $ (1,854 $   $  
Income (loss) before benefit (provision) for income taxes $ (8,277 $ 6,675   $ 78,299   $ (2,815 $ (2,787
Benefit (provision) for income tax $ (72 $ (137 $ 172   $ (254 $  
Net income (loss) $ (8,349 $ 6,538   $ 78,471   $ (3,069 $ (2,787
                   
Other Financial Data (unaudited):                  
Core earnings (losses)(1) $ 6,854   $ 3,855   $ 16,335   $ (1,657 $  
                   
Per Share Data:                  
Earnings (loss) per share:
Basic $ (3.27 $ 2.70   $ 31.57   $ (1.22 $ (1.13
Diluted $ (3.27 $ 0.20   $ 2.36   $ (1.22 $ (1.13

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  Three Months Ended
March 31,
Year Ended
December 31,
($ in thousands, except per share data) 2004 2003 2003 2002 2001
  (unaudited)
Book value per share:
Basic(2) $ 81.17   $ 58.66   $ 84.94   $ 56.75   $ (2.31
Diluted(3) $ 6.27   $ 4.45   $ 6.49   $ 4.28   $ (2.31
Weighted average number of common shares outstanding:                  
Basic   2,550     2,421     2,486     2,479     2,448  
Diluted   2,550     33,241     33,292     2,479     2,448  

  As of March 31, 2004
  Actual Pro Forma(4) Pro Forma as
Adjusted(5)
    (unaudited)
Balance Sheet Data:
Cash and cash equivalents $ 240,548   $ 240,548   $                
Short-term investments $ 23,624   $ 23,624  
Unrealized gain on credit swaps, at fair value $ 32,446   $ 32,446  
Total assets $ 309,564   $ 309,564  
Unrealized loss on credit swaps, at fair value $ 394   $ 394  
Total liabilities $ 4,063   $ 4,063  
Shareholders' equity $ 206,980   $ 206,980        
Total liabilities, preferred securities of subsidiary and shareholders' equity $ 309,564   $ 309,564   $  
(1) We believe that "core earnings (losses)" provides our investors with a helpful way to analyze the growth and profitability of our business and the performance of our management. Specifically, the use of core earnings (losses) provides a measure of the financial results of our business that is not impacted by the (1) adjustments to our revenues that are caused solely by externally driven changes in the market value of our credit swap portfolio or (2) immediate recognition of the full amount of gains from early terminated credit swaps included in our revenue. Because non-United States GAAP financial measures are not standardized, it may not be possible to compare core earnings (losses) with other companies' non-United States GAAP financial measures that have the same or similar names. The presentation of this supplemental information is not meant to be considered in isolation or as a substitute for net income (loss) or other measures of financial performance reported in accordance with United States GAAP. The reconciliation of core earnings (losses) to net income (loss) is set forth below. For additional information regarding this non-United States GAAP financial measure and an explanation of why we believe core earnings (losses) is a financial measure that is useful to management and investors, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Additional Financial Measures."

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  Three Months Ended
March 31,
Year Ended
December 31,
($ in thousands) 2004 2003 2003 2002
Net United States GAAP income (loss) $ (8,349 $ 6,538   $ 78,471   $ (3,069
Add development stage expenses               4,292  
Add (less) change in fair value of credit swaps, excluding credit swaps purchased as short-term investments   14,924     (1,145   (46,716   213  
Less realized gains on terminated credit swaps sold   (1,173   (1,770   (18,313   (3,146
Add amortization of gains on terminated credit swaps sold   1,452     232     2,893     53  
Core earnings (losses) $ 6,854   $ 3,855   $ 16,335   $ (1,657
(2) Book value per share is based on total shareholders' equity divided by basic common shares outstanding.
(3) Diluted book value per share is based on total shareholders' equity plus the assumed exercise of all dilutive options and warrants divided by diluted shares outstanding.
(4) The balance sheet data as of March 31, 2004 reflects the pro forma effect of the conversion of all the Series A preferred shares into 29,583,148 common shares in connection with this offering and a one for 8.1 reverse share split of our common shares to be effected immediately prior to the completion of this offering.
(5) As adjusted to give effect to the sale of a total of              common shares in this offering at an assumed public offering price of $          per share, the midpoint of the range set forth on the cover of the prospectus.

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RISK FACTORS

Your investment in our common shares will involve some risks. You should carefully consider the following discussion of these risks, together with the other information contained in this prospectus, before deciding whether an investment in our common shares is suitable for you.

The risks and uncertainties described in this prospectus are not the only risks we face. However, these are the risks our management believes are material. Additional risks not presently known to us or that we currently deem immaterial may also impair our business or results of operations. Any of the risks described below could have a significant or material adverse effect on our results of operations or financial condition, and a corresponding decline in the market price of our common shares.

Risks Related to our Business

The failure to manage effectively the risk of credit losses could have a material adverse effect on our financial condition, results of operations and credit ratings.

We cannot assure you that any of the loss mitigation methods we use in managing our credit swap portfolio will be effective. If, for example, multiple credit defaults or other credit events that exceed our expectations occur within a short time period, the payments we would be required to make under the related credit swaps could materially and adversely affect our financial condition, results of operations and credit ratings. Many of Primus Financial's credit swaps are new and the underlying Reference Entities may not have had time to exhibit problems. Moreover, even though we may identify a heightened risk of default with respect to a particular Reference Entity, our ability to limit our losses, such as through hedging or terminating the credit swap, before a default or other credit event actually occurs could be limited by inadequate liquidity in the credit swap market. We also intend to enter into new businesses, including selling credit swaps referencing obligations of Reference Entities that are below investment grade, which may not have the same or similar loss limitation methods. We have not sold credit swaps on Reference Entities that are below investment grade. There can be no assurance that we will be able to effectively manage higher risks of credit losses or that any of our existing loss mitigation methods will be effective in any of these new businesses.

Primus Financial's operating guidelines and S&P's and Moody's capital requirements are subject to change and may limit our growth. Additionally, a decline in our current counterparty credit ratings from S&P and Moody's would likely have a material adverse impact on our business and cause our revenues and earnings to decrease.

In order to obtain and maintain its counterparty credit ratings, Primus Financial has adopted operating guidelines, the terms of which have been agreed upon with S&P and Moody's. We cannot assure you that S&P and Moody's will not require changes to Primus Financial's operating guidelines or that, if such changes are made, Primus Financial will be able to comply with them. For example, if S&P and Moody's were to require Primus Financial to maintain additional capital to retain its AAA/Aaa ratings, we cannot be certain that we could raise additional capital when needed. Moreover, if Primus Financial suffers losses to such an extent that it is not in compliance with the capital criteria of its operating guidelines and it is not able to cure the capital deficiency in a timely manner, its operating guidelines require it to cease entering into new credit swaps (except for limited hedging transactions, as described in the operating guidelines). If the foregoing occur, S&P and Moody's could reduce or withdraw their AAA/Aaa credit ratings of Primus Financial which, in turn, would likely have a material adverse effect on our business and our financial performance.

We are dependent on counterparties' perception of our creditworthiness.

In establishing relationships, Primus Financial's counterparties generally analyze its financial condition prior to entering into a credit swap, establish credit limits, and monitor the appropriateness of these limits on an ongoing basis to limit the risk that it will be financially unable to make payments in accordance with the credit swap. Once a counterparty reaches its credit exposure limit to Primus

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Financial, the counterparty may not enter into any additional transactions with Primus Financial until the counterparty credit limit is increased. In the event these counterparty credit limits are not increased as Primus Financial's credit swap portfolio expands or if limits are reduced, our financial performance would suffer. In addition, while there are buyers of credit swaps, such as our existing counterparties, that do not require us to post collateral, there are some buyers, including some of the leading participants in the credit swap market, that require even the highest rated counterparties from which they purchase credit swaps to post collateral. As of March 31, 2004, none of our existing counterparties have required us to post collateral. If our existing counterparties were to require us to post collateral, it may have a material adverse effect on us and our financial condition and restrict our growth.

We depend on a limited number of key executives.

The loss of any of our key personnel, including Thomas Jasper, our chief executive officer, and other individuals listed in the "Management" section of this prospectus, many of whom have long-standing relationships with our counterparties, could have a material adverse effect on us. As our business develops and expands, we believe that our success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. We cannot assure you that we will continue to be able to employ key personnel or that we will be able to attract and retain qualified personnel in the future. We do not have "key person" life insurance to cover our executive officers. We have employment contracts with all our executive officers. See "Management—Employment Agreements". Failure to retain or attract key personnel could have a material adverse effect on us.

We have a limited operating history, and our future performance is uncertain.

We and our subsidiaries are relatively new companies with limited operating histories. As a result, there is limited historical financial and operating information available to help you evaluate our past performance or to make a decision about an investment in our common shares. Companies in their initial stages of development present substantial business and financial risks and may suffer significant losses. New companies must successfully develop business relationships, establish operating procedures, hire staff, install management information and other systems, establish facilities and obtain licenses, as well as take other steps necessary to conduct their intended business activities. As a result of these risks, it is possible that we may not be successful in implementing our business strategy or in completing the development of the infrastructure necessary to run our business. In addition, because of our limited operating history, our historical financial results may not accurately predict our future performance. As a result of industry factors or factors specific to us, we may have to alter our anticipated methods of conducting our business, such as the nature, amount and types of risks we assume.

Our financial results depend on certain market conditions and growth in the credit swap market which are not within our control.

Our financial results depend to a significant degree upon the premiums that we receive on our credit swaps. Historically, these premiums have been a function of credit spreads that change over time as a result of a variety of factors which we do not control, including changes in the overall economy, supply and demand conditions in the credit swap market and other factors affecting the corporate credit markets in general. If a low credit swap premium environment develops and persists, we may not be able to achieve profitable growth, which may have a material adverse effect on our financial condition and our results of operations. In addition, there can be no assurance that the credit swap market will continue to grow as it has historically or at all or that it will not decline. Any such decline could have a material adverse effect on our business and financial condition and restrict our growth.

Variations in credit swap premiums could cause our earnings to be inconsistent and our share price to fluctuate significantly.

Any event causing credit swap premiums to widen or tighten on an underlying Reference Entity in our portfolio will affect the fair value of related credit swaps, and may increase the volatility of our

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earnings and, in turn, our share price. Common events that may cause credit swap premiums to fluctuate include changes in national or regional economic conditions, industry cyclicality, credit events within an industry, changes in a Reference Entity's operating results, credit rating, cost of funds, management or any other factors leading investors to revise expectations about a Reference Entity's ability to pay principal and interest on its debt obligations when due. Changes in fair value of our credit swaps are recorded as unrealized gains or losses in our consolidated income statement. In 2003, a decline in premium levels caused an increase in the fair value of our credit swap portfolio which resulted in net unrealized gain of $46.7 million, or 44.2% of our consolidated revenues for the year ended December 31, 2003. Wide fluctuations in the premium levels may have a material effect on our reported results of operations. For example, for the three months ended March 31, 2004, increasing premium levels caused a decrease in the fair value of our credit swap portfolio which contributed to a net unrealized loss of $14.5 million.

We may require additional capital in the future which may not be available on favorable terms or at all.

If we require additional capital, we may need to raise additional funds through financings or curtail our growth and reduce our assets. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of the common shares offered hereby. If we cannot obtain adequate capital, our business, results of operations and financial condition could be adversely affected.

Certain of our existing shareholders control us and will continue to control us after this offering.

After the offering, our principal shareholders, directors and executive officers and entities affiliated with them will own     % of our outstanding common shares (including              shares issuable within 60 days of                     , 2004 upon the exercise of warrants and options). As a result, these existing shareholders will continue, collectively, to be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other shareholders, the outcome of any corporate action submitted to our shareholders for approval, including potential mergers, amalgamations or acquisitions, asset sales and other significant corporate transactions. These existing shareholders will also have sufficient voting power to amend our organizational documents. We cannot assure you that the interests of our existing shareholders will coincide with the interests of other holders of our common shares. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their common shares as part of a sale of our company and might reduce our share price.

The commercial and investment activities of some of our existing shareholders may compete with our business.

Certain of our existing shareholders engage in commercial activities and enter into transactions or agreements with us or in competition with us. Some of our existing shareholders or their affiliates may in the future sponsor other entities engaged in the credit swap business, some of which may compete with us. Certain of our existing shareholders and their affiliates have also entered into agreements with and made investments in numerous companies that may compete with us. Our existing shareholders may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our existing shareholders continue to own a significant amount of our outstanding common shares, they will continue to be able to strongly influence or effectively control our decisions.

We do not intend to pay cash dividends on our common shares for the foreseeable future.

We do not intend to pay cash dividends on our common shares for the foreseeable future. We intend to retain all available funds for use in the operation and expansion of our business. Additionally, we are a holding company with no operations or significant assets other than our

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ownership of all of our subsidiaries. There are certain restrictions on Primus Financial contained in its operating guidelines which could affect the ability of Primus Guaranty to pay dividends in future years. The payment of dividends and making of distributions by each of Primus Guaranty and Primus Re is limited under Bermuda law and regulations. Any determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and any other factors our board of directors deems relevant. See "Tax Considerations" for other consequences of owning our common shares.

We may not be able to continue to compete in the credit swap market.

The credit swap market is highly competitive. We face competition from providers of similar products, including certain insurance companies and affiliates of our shareholders, and, to a limited extent, the credit swap dealers of commercial and investment banks. Many of these competitors are more established, have substantially greater financial resources than we do and have established ongoing relationships with market participants giving them ready access to the credit swap marketplace. In addition, while there are significant business obstacles to overcome in establishing a similar enterprise to ours, there are no regulatory impediments for any new entrants to the credit swap market. To the extent new participants enter the credit swap market, competition may intensify. While we believe we have a number of competitive advantages over new entrants, there can be no assurance that increased competition will not materially adversely affect our business and financial condition.

We cannot assure you that we will not incur losses as we begin selling credit swap protection on tranches of pools of obligations of Reference Entities and selling credit swaps for non-investment grade obligations. We also cannot assure you that we will not incur losses as we continue to purchase credit protection.

We cannot assure you that we will not incur losses when we begin selling credit swap protection on tranches of pools of obligations of Reference Entities. Additionally, we may enter into the credit swap market for non-investment grade obligations where the risk of credit losses is typically higher than in our existing business. If we do not accurately analyze the Reference Entity credit risks and assess the risks and leverage associated with selling credit protection for tranches of these pools, then we may suffer unexpected losses, which could adversely affect our results of operations and our credit ratings.

We have recently started on a limited basis to purchase credit swap protection to take advantage of short-term market fluctuations. The notional amount outstanding on credit swaps we purchased as short-term investments was $125 million and $187.5 million at March 31, 2004 and June 7, 2004, respectively. This is a different activity from our normal course investing activity and is highly dependent on the absolute level of credit swap premiums, premium volatility and credit selection. We have a limited track record in buying protection and our performance to date has only added marginally to our net income. We cannot predict that opportunities will exist for us to buy protection nor can we assure you that we will not incur losses from this activity.

There can be no assurance that our diversification strategy will be effective or profitable.

We may experience delays, regulatory impediments and other complications in implementing our diversification strategy that could reduce our profitability and ultimately cause the strategy to fail. We plan to diversify through the development and marketing of ancillary businesses and, in select instances, by acquisition. Each new business line requires the investment of additional capital and the significant involvement of our senior management to acquire or develop a new line of business and integrate it with our operations.

We may have difficulty executing our growth strategy and managing our growth effectively.

Continuing to grow our business will require increased investment in personnel and the assumption of risks that may be greater than we have previously assumed. Unless our growth results

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in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our gross margin, and our future profitability, will be adversely affected.

We may be adversely affected by foreign currency fluctuations.

We enter into credit swaps under which we are obligated to pay losses in currencies other than United States dollars. We may, from time to time, experience losses from fluctuations in the values of non-United States currencies, which could significantly affect our results of operations. Credit swap premiums on Euro-denominated credit swaps are paid to us in Euros and we do not convert such premiums into United States dollars. However, all of our capital is United States dollar-denominated. We cannot assure you that the credit swap premiums retained will be sufficient to cover Euro-denominated losses and that we will not incur significant conversion costs in order to cover such losses.

Our operations may become subject to increased regulation under federal and state law or existing regulations may change, which may result in administrative burdens, increased costs or other adverse consequences for us.

There can be no assurance that new legal or administrative interpretations or regulations under the United States commodities and securities laws, or other applicable legislation on the federal or state levels, or in Bermuda or other applicable jurisdictions, will not result in administrative burdens, increased costs, or other adverse consequences for us. Periodically, proposals have been made in Congress to enact legislation that would increase regulation of the credit swap market. We cannot predict what restrictions any such legislation, if adopted, would impose and the effect those restrictions would have on our business. In addition, federal statutes allocate responsibility for insurance regulation to the states and state insurance regulators may interpret their state insurance laws to include credit swaps as insurance contracts subject to regulation. Again, we cannot predict what effect any such regulation would have on our business.

Credit swap buyers typically use credit swaps to manage risk and regulatory capital requirements that limit their credit exposure to a Reference Entity. Regulatory changes that modify the permissible limits of credit risk exposure, or affect the use of credit swaps to reduce risk, may have a material adverse effect on our business.

In addition, we believe that we are not required to be registered as an "investment company" under the Investment Company Act of 1940. If we are required to so register as an investment company, we would have to comply with a variety of restrictions, including limitations on our capital structure, restrictions on our investments, prohibitions on transactions with affiliates and compliance requirements that could limit our growth and increase our costs. There is no assurance that we could function effectively if we are required to register as an investment company.

Risks Related to Taxation

Our status as a PFIC may result in significant additional tax costs for shareholders who are
United States taxpayers.

Primus Guaranty and Primus Barbados are likely to be and remain passive foreign investment companies, or PFICs, for United States federal income tax purposes. There are potentially adverse United States federal income tax consequences of investing in a PFIC for a shareholder who is a United States taxpayer. These consequences include the following: (1) if a shareholder makes a qualified electing fund, or QEF election, with respect to Primus Guaranty and Primus Barbados, the shareholder will have to include annually in his or her taxable income an amount reflecting an allocable share of the income of Primus Guaranty or Primus Barbados, regardless of whether dividends are paid by Primus Guaranty to the shareholder, (2) if a shareholder makes a mark-to-market election with respect to Primus Guaranty, the shareholder will have to include annually in his or her taxable income an amount reflecting any year-end increases in the price of our

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common shares, regardless of whether dividends are paid by Primus Guaranty to the shareholder (moreover, it is unclear how such an election would affect the shareholder with respect to Primus Barbados), and (3) if a shareholder does not make a QEF election or a mark-to-market election, he or she may incur significant additional United States federal income taxes with respect to dividends on, or gain from, the sale or other disposition of, our shares, or with respect to dividends from Primus Barbados to us, or with respect to our gain on any sale or other disposition of Primus Barbados shares. See "Tax Considerations—Taxation of Shareholders—United States Holders—Passive Foreign Investment Companies."

If we are found to be engaged in a United States business, we may be liable for significant
United States taxes.

We believe that Primus Guaranty and Primus Barbados, both directly and through Primus Barbados' indirect ownership interest in Primus Financial (which for United States federal income tax purposes is treated as a partnership interest), will operate their businesses in a manner that should not result in their being treated as engaged in a trade or business within the United States. In particular, we believe that the sales of credit swaps by Primus Financial are best treated as transactions of an investor or trader and thus should not be treated as the conduct of a United States trade or business. Consequently, we do not expect to pay United States corporate income or branch profits tax on Primus Financial's income. However, because the determination of whether a foreign corporation is engaged in a trade or business in the United States is inherently factual and there are no definitive standards for making such a determination, there can be no assurance that the United States Internal Revenue Service, or IRS, will not contend successfully that Primus Guaranty, Primus Barbados or Primus Financial are engaged in a trade or business in the United States. The maximum combined rate of United States corporate federal, state and local income tax that could apply to Primus Financial or Primus Barbados, were they found to be engaged in a United States business in New York City and subject to income tax, is approximately 46% (not including United States branch profits tax that would be imposed on Primus Barbados were Primus Financial deemed to be making distributions to Primus Barbados). See "Tax Considerations—Taxation of Primus Guaranty and its Subsidiaries—United States Taxation—Primus Guaranty, Primus Barbados and Primus Financial."

If the IRS successfully challenges the treatment Primus Financial has adopted for its credit swap transactions, the timing and character of taxable income recognized by Primus Financial could be adversely affected.

Consistent with its treatment of the credit swaps sold by Primus Financial as the sale of options for United States federal income tax purposes, we have determined that in general Primus Financial will recognize income or loss as a protection seller only upon default or termination of the credit swaps. There is no definitive authority in support of the treatment by Primus Financial of its credit swaps as options for United States federal income tax purposes, and we do not intend to seek a ruling from the IRS on this point. In addition, the IRS has been studying the treatment of derivative transactions generally, including credit swaps, and certain proposals under discussion could be inconsistent with the tax treatment adopted by Primus Financial. If the IRS were to assert successfully that the credit swaps sold by Primus Financial should be treated differently or these proposals were adopted, (1) the timing of the income recognized by Primus Financial could be accelerated, (2) the character of this income could be altered and (3) Primus Barbados, as a non-United States person, could be subject to United States income or withholding tax at the rate of 30%. In addition, were these changes in character to apply and were Primus Barbados (through its investment in Primus Financial) found to be engaged in a United States trade or business, Primus Barbados's recognition of taxable income would be accelerated. See "Tax Considerations—Taxation of Primus Guaranty and its Subsidiaries—United States Taxation—Primus Guaranty, Primus Barbados and Primus Financial."

Prospective investors are urged to consult their own tax advisors concerning their particular circumstances and the United States federal, state, local, and non-United States tax consequences to them of owning and disposing of our common shares.

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Risks Related to Our Status as a Bermuda Company

It may be difficult to enforce service of process and enforcement of judgments against us and our officers and directors.

Because Primus Guaranty is organized under the laws of Bermuda, it may not be possible to enforce court judgments obtained in the United States against Primus Guaranty based on the civil liability provisions of the federal or state securities laws of the United States in Bermuda or in countries other than the United States where Primus Guaranty has assets. In addition, there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce judgments of United States courts obtained against Primus Guaranty or its directors or officers based on the civil liabilities provisions of the federal or state securities laws of the United States, or would hear actions against Primus Guaranty or those persons based on those laws. We have been advised by our legal advisors in Bermuda that the United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely on United States federal or state securities law, would not automatically be enforceable in Bermuda. There are grounds upon which a Bermuda court may not enforce the judgments of United States courts and some remedies available under the laws of United States jurisdictions, including some remedies available under United States federal securities laws, may not be permitted under Bermuda courts as contrary to public policy in Bermuda. Similarly, those judgments may not be enforceable in countries other than the United States where Primus Guaranty has assets. Further, no claim may be brought in Bermuda by or against Primus Guaranty or its directors and officers in the first instance for violation of United States federal securities laws because these laws have no extraterritorial application under Bermuda law and do not have force of law in Bermuda; however, a Bermuda court may impose civil liability, including the possibility of monetary damages, on Primus Guaranty or its directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.

United States persons who own our common shares may have more difficulty in protecting their interests than United States persons who are shareholders of a United States corporation.

The Companies Act 1981, as amended, of Bermuda, or the Bermuda Companies Act, which applies to Primus Guaranty and Primus Re, differs in certain material respects from laws generally applicable to United States corporations and their shareholders. As a result of these differences, United States persons who own our shares may have more difficulty protecting their interests than would United States persons who own common shares of a United States corporation. To further understand the risks associated with United States persons who own our common shares, see "Description of Share Capital—Differences between Bermuda and Delaware Corporate Law" for more information on the differences between Bermuda and Delaware corporate laws.

We may become subject to taxes in Bermuda after 2016, which may have a material adverse effect on our financial condition and operating results and on an investment in our common shares.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda, has given each of Primus Guaranty and Primus Re an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then subject to certain limitations, the imposition of any such tax will not be applicable to Primus Guaranty, Primus Re or any of their respective operations, shares, debentures or other obligations until March 28, 2016. Given the limited duration of the Minister of Finance's assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016. Since we are incorporated in Bermuda, we will be subject to changes of law or regulation in Bermuda that may have an adverse impact on our operations, including imposition of tax liability. See "Tax Considerations—Taxation of Primus Guaranty and Its Subsidiaries—Bermuda Taxation."

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The effect of Bermuda's letter of commitment to the OECD to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.

A number of multinational organizations, including the Organization for Economic Cooperation and Development, the European Union, the Financial Action Task Force and the Financial Stability Forum, have all recently identified some countries as not participating in adequate information exchange, engaging in harmful tax practices or not maintaining adequate controls to prevent corruption, such as money laundering activities. The Organization for Economic Cooperation and Development, which is commonly referred to as the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD's report dated June 26, 2000, Bermuda was not listed, and continues not to be listed as an "uncooperative tax haven" because it had previously signed a letter committing itself to eliminate harmful tax practices by the end of 2005, and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. However, it is possible that the OECD could change its view in the future and decide to list Bermuda as an uncooperative tax haven, or that one of the other multinational organizations could take a different view from the OECD and decide to recommend sanctions against Bermuda. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes and reduce our net income.

Risks Related to this Offering

We cannot predict how actively our common shares will trade, the possible volatility of our share price or the effect that these factors may have on the value of the common shares you purchase in this offering.

The public offering price of our common shares offered by this prospectus will be determined by negotiation between us and the representatives for the underwriters. The price of our common shares after this offering may fluctuate widely. The reasons for these fluctuations may include the investment community's perception of our prospects and of our industry in general. Differences between our actual operating results and those expected by investors and analysts and changes in analysts' recommendations or projections could also affect the price of our common shares. Other factors potentially causing volatility in the price for our common shares may include:

•  changes in general economic or market conditions and broad market fluctuations, particularly those affecting the prices of the common shares of companies engaged in businesses similar or related to our business;
•  how actively our shares trade; and
•  the research reports that industry or securities analysts publish about us or our business.

We are applying to have our common shares listed on the NYSE. Such a listing does not, however, guarantee that an active and liquid trading market for our common shares will develop.

Substantial future sales of our common shares in the public market could cause our share price to fall.

Additional sales of our common shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common shares to decline. Upon completion of this offering, we will have                      common shares outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or Securities Act. The remaining common shares outstanding after this offering will be available for sale, subject to the 180-day lock up agreements under which our directors, executive officers and all of our shareholders have agreed not to sell or otherwise dispose of their common shares in the public market, and subject to the manner of sale and notice requirements and the volume limitations on sales of shares contained in Rule 144 under the Securities Act.

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Any or all of these shares may be released prior to expiration of the 180-day lockup period at the discretion of Lehman Brothers Inc., or Lehman Brothers. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common shares could decline. Immediately following the 180-day lockup period,                      of our common shares outstanding after this offering will become available for sale. The remaining common shares will become available for sale at various times thereafter upon the expiration of one-year holding periods.

In addition, beginning 180 days after this offering, the holders of approximately                      common shares will be entitled to rights to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares, other than shares purchased by our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See "Shares Eligible for Future Sale".

Purchasers in this offering will immediately experience substantial dilution in net tangible book value.

Because our common shares have in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $                     per share in pro forma net tangible book value, based on an assumed initial offering price of $                     per share, the midpoint of the range set forth on the cover page of this prospectus. The exercise of outstanding options and warrants may result in further dilution. See "Dilution".

Our anti-takeover provisions could prevent or delay a change of control of our company, even if a change of control would be beneficial to our shareholders, and could impede an attempt to replace or remove our directors, which could diminish the value of our common shares.

Our Bye-laws contain provisions that may make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future:

For example, our Bye-laws contain the following provisions that could have such an effect:

•  election of our directors is staggered, meaning that only one-third of our directors are elected each year;
•  shareholders have only limited ability to remove directors;
•  authorization, without prior shareholder approval, to create and issue preferred shares with voting or other rights or preferences that could impede the success of any attempt to acquire us or change our control, commonly referred to as "blank check" preferred shares;
•  our directors may decline to approve or register the transfer of any common shares on our share register if it appears to the board of directors that any adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any registered owner of our shares or its affiliates, would result from such transfer (other than such as our board of directors considers to be minimal); and
•  business combinations with persons, who acquire 15% or more of our common shares without our board's approval, are restricted for three years.

We will incur increased costs as a result of being a public company.

As a public company, we will incur annually significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new

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rules subsequently implemented by the Securities and Exchange Commission, or SEC, and NYSE, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a public company, we have added independent directors, created additional board committees and will be implementing policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate with assurance the amount of additional costs we may incur or the timing of such costs.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the "Risk Factors" section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements.

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USE OF PROCEEDS

We expect that the net proceeds we will receive from the sale of the common shares offered by us will be approximately $            , based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use up to $60.0 million of the net proceeds of this offering to provide additional capital to Primus Financial. The remainder of the proceeds from the offering will be used as working capital and for general corporate purposes, including expanding our credit swap business and pursuing opportunities in complementary businesses. We will not receive any of the proceeds from the sale of shares by the selling shareholders.

We have not yet determined all of our expected expenditures, and we cannot estimate the amounts to be used for each purpose set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds of this offering in United States government securities and money market instruments.

DIVIDEND POLICY

We intend to retain all available funds for use in the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future. Any determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends and any other factors our board of directors deems relevant. See "Prospectus Summary—Notice to United States Investors—Tax Consequences of Owning Our Shares".

We are a holding company and have no direct operations. Our ability to pay dividends depends, in part, on the ability of our subsidiaries to pay distributions to us.

Primus Financial's operating guidelines restrict the payment of dividends to once per year. The payment of dividends by Primus Financial is contingent upon a dividend payment not resulting in a capital shortfall under its operating guidelines and the dividend not exceeding 25% of Primus Financial's net income (excluding mark-to-market unrealized gains or losses on credit swaps). Primus Financial is further restricted from paying dividends under the terms of its Floating Rate Cumulative Preferred Stock, or PFP Cumulative Preferred Stock, unless all of the cumulative distributions on the PFP Cumulative Preferred Stock have been previously made or set aside. Primus Financial's $37.5 million credit facility also restricts payment of dividends by Primus Financial except as permitted by its operating guidelines. Our insurance subsidiary, Primus Re, is also subject to significant regulatory restrictions limiting its ability to declare and pay dividends.

Further, we are subject to Bermuda law and regulatory constraints that will affect our ability to pay dividends on our common shares and make other payments. Under the Bermuda Companies Act, each of Primus Guaranty and Primus Re may declare or pay a dividend out of distributable reserves only if each of us has reasonable grounds for believing that each of us is, or would after the payment be, able to pay our respective liabilities as they become due and if the realizable value of our respective assets would thereby not be less than the aggregate of our respective liabilities and issued share capital and share premium accounts. See "Business—Certain Bermuda Law Considerations".

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2004:

•  on an actual basis;
•  on a pro forma basis to give effect to (1) a one for 8.1 reverse share split to be effected immediately prior to the completion of this offering; and (2) the automatic conversion of all outstanding shares of our convertible preferred shares into an aggregate of 29,583,148 common shares upon completion of this offering; and
•  on a pro forma as adjusted basis to give effect to the sale of a total of          common shares in this offering at an assumed public offering price of $             per share, the midpoint of the range set forth on the cover of the prospectus.

This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this prospectus.


($ in thousands)   As of March 31, 2004
  Actual Pro Forma As Adjusted
             
Preferred shares of subsidiary $ 98,521   $ 98,521   $              
             
Shareholders' equity:            
Common shares, $0.01 par value, 61,913,580 shares authorized, 2,567,901 shares issued and 2,549,829 shares outstanding, actual; 32,151,049 common shares, $0.01 par value, issued and 32,132,977 outstanding, pro forma;              shares authorized,              shares issued and              outstanding, pro forma as adjusted   30     326  
Additional paid-in-capital   2,016     145,628  
Series A Convertible Voting Preferred Shares,
$0.01 par value, 100,000,000 shares authorized, 6,212,000 shares issued and outstanding, actual; none authorized, issued and outstanding, pro forma and pro forma as adjusted
  143,908      
Warrants   1,070     1,070  
Retained earnings   59,956     59,956        
Total shareholders' equity   206,980     206,980        
Total preferred shares of subsidiary and shareholders' equity $ 305,501   $ 305,501   $  

The number of common shares excludes:

•  525,295 common shares issuable upon exercise of options outstanding as of March 31, 2004, under our 2002 stock incentive plan, with a weighted average exercise price of $             per share;
•  2,445,240 common shares issuable upon exercise of warrants outstanding as of March 31, 2004, with an exercise price of $5.25 per share and an expiration date of March 14, 2007; and
•             additional common shares reserved for issuance under our employee share incentive plans.

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DILUTION

If you invest in our common shares, your interest will be diluted to the extent of the difference between the public offering price per share of our common shares and the pro forma as adjusted net tangible book value per share of our common shares immediately after this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of our common shares outstanding. Investors participating in this offering will incur immediate, substantial dilution.

Our net tangible book value at March 31, 2004, before adjustment for this offering, was approximately $            , or approximately $             per share, after giving effect to the conversion of all outstanding shares of our convertible preferred shares into common shares upon the closing of this offering. After giving effect to the sale of common shares in this offering, at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated offering expenses, our as adjusted net tangible book value at March 31, 2004 would have been $             or $             per share. This represents an increase in net tangible book value of $             per share to our existing shareholders and an immediate dilution (i.e., the difference between the public offering price per unit and the net tangible book value per share adjusted for this offering) at March 31, 2004 of $             per share to purchasers of the common shares offered hereby. The following table illustrates this per share dilution:


Assumed initial public offering price per share       $               
Net tangible book value per share
at March 31, 2004
      $               
Increase in net tangible book value per share
attributable to the new investors
      $               
As adjusted net tangible book value per share after this offering       $               
Dilution per share to new investors       $               

The above table excludes the possible exercise of 1,397,280 outstanding warrants to purchase our common shares which have an exercise price of $5.25 per share and expire on March 14, 2007.

Assuming the underwriters' over-allotment option is exercised in full, the net tangible book value at March 31, 2004 would have been $            , or $             per share, the immediate increase in net tangible book value of shares owned by existing shareholders would have been $             per share, and the immediate dilution to purchasers of the common shares in this offering would have been $             per share.

The following table summarizes at March 31, 2004, after giving effect to the sale of            common shares at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, the number of common shares purchased from us, the total consideration paid to us for those shares and the consideration given by the existing shareholders and by the new investors assuming approximately            common shares are outstanding:


  Shares
Purchased
Total Consideration Average Price
Per Share
  Number Percent Amount Percent
Existing shareholders                    $              $           
New investors                              
Total         100.00 $     100.00      

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present our historical financial and operating data as of the dates or for the periods indicated. We derived the data for the years ended December 31, 2003, 2002 and 2001 from our consolidated financial statements, which have been prepared in accordance with United States GAAP and audited by Ernst & Young LLP. The company's historical financial statements for the years ended December 31, 2000 and 1999 have not been audited, but, in the opinion of management, contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of our results of operations for these periods and financial position as of those dates. The statement of operations data for the three months ended March 31, 2004 and 2003, and the balance sheet data as of March 31, 2004, are derived from, and are qualified by reference to, our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair presentation of our financial position and results of operations for these periods. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting periods. Until March 2002, we were in a development stage. We were capitalized on March 14, 2002 and began to sell credit swaps in June 2002. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.


($ in thousands, except per share data) Three Months Ended March 31, Year Ended December 31,
  2004 2003 2003 2002 2001 2000 1999
  (unaudited)       (unaudited)
Consolidated Statements of Operations Data:                              
Revenues:                              
Net premiums earned $ 9,644   $ 8,921   $ 38,516   $ 11,768   $   $   $  
Net realized gains on credit swaps   1,582     1,556     17,629     2,843              
Net unrealized gains (losses) on credit swaps   (14,474   1,145     46,739     (213            
Interest income earned   652     672     2,617     1,610     2     5     3  
Other income   (34   27     107     12              
Total revenues $ (2,630 $ 12,321   $ 105,608   $ 16,020   $ 2   $ 5   $ 3  
                               
Expenses:                              
Employee compensation $ 3,423   $ 2,417   $ 11,701   $ 6,428   $   $   $  
Other expenses   1,682     3,008     13,754     8,115              
Development stage expenses               4,292     2,789     3,109     1,001  
Total expenses $ 5,105   $ 5,425   $ 25,455   $ 18,835   $ 2,789   $ 3,109   $ 1,001  
                               
Distributions on preferred securities of subsidiary $ (542 $ (221 $ (1,854 $   $   $   $  
                               
Income (loss) before benefit (provision) for income taxes $ (8,277 $ 6,675   $ 78,299   $ (2,815 $ (2,787 $ (3,104 $ (998
Benefit (provision) for income taxes   (72   (137   172     (254            
Net income (loss) $ (8,349 $ 6,538   $ 78,471   $ (3,069 $ (2,787 $ (3,104 $ (998
                               
Basic earnings (loss) per share $ (3.27 $ 2.70   $ 31.57   $ (1.22 $ (1.13 $ (258.66 $ (83.16
Diluted earnings (loss) per share $ (3.27 $ 0.20   $ 2.36   $ (1.22 $ (1.13 $ (258.66 $ (83.16
                               
Weighted average number of common shares outstanding:                              
Basic   2,550     2,421     2,486     2,479     2,448     12     12  
Diluted   2,550     33,241     33,292     2,479     2,448     12     12  
                               
Other Financial Data (unaudited):                              
Core earnings (losses)(1) $ 6,854   $ 3,855   $ 16,335   $ (1,657 $   $   $  

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($ in thousands, except per share data) As of March 31, As of December 31,
  2004 2003 2003 2002 2001 2000 1999
Balance Sheet Data: (unaudited)                   (unaudited)
Assets                              
Cash and cash equivalents $ 240,548   $ 224,508   $ 257,967   $ 220,975   $ 136   $ 138   $ 123  
Short-term investments   23,624     36     3,968                  
Unrealized gain on credit swaps, at fair value   32,446     6,814     46,594     5,705              
Fixed assets and capitalized software   6,809     11,776     7,124     12,322              
Other assets   6,137     5,113     5,776     5,859              
Total assets $ 309,564   $ 248,248   $ 321,429   $ 244,861   $ 136   $ 138   $ 123  
                               
Liabilities and shareholders' equity                              
Unrealized loss on credit swaps, at fair value $ 394   $ 5,882   $ 68   $ 5,918   $   $   $  
Other liabilities   3,669     1,823     8,002     5,191     6,981     4,328     1,208  
Total liabilities $ 4,063   $ 7,705   $ 8,070   $ 11,109   $ 6,981   $ 4,328   $ 1,208  
                               
Preferred securities of subsidiary   98,521     98,521     98,521     98,521              
                               
Shareholders' equity                              
Common Stock $ 30   $ 213   $ 230   $ 208   $ 240   $ 12   $ 12  
Convertible Preferred Stock   143,908     143,908     143,908     143,908     12          
Retained earnings (accumulated deficit)   59,956     (3,628   68,305     (10,166   (7,097   (4,310   (1,205
Additional paid-in-capital   2,016     458     1,325     211         108     108  
Warrants   1,070     1,070     1,070     1,070              
Total shareholders' equity (deficit) $ 206,980   $ 142,021   $ 214,838   $ 135,231   $ (6,845 $ (4,190 $ (1,085
                               
Total liabilities, preferred securities of subsidiary and shareholders' equity $ 309,564   $ 248,248   $ 321,429   $ 244,861   $ 136   $ 138   $ 123  
                               
Per share data:                              
Book value per share(2) $ 81.17   $ 58.66   $ 84.94   $ 56.75   $ (2.31 $ (349.17 $ (90.42
Diluted book value per share(3) $ 6.27   $ 4.45   $ 6.49   $ 4.28   $ (2.31 $ (349.17 $ (90.42
(1) We believe that "core earnings (losses)" provides our investors with a helpful way to analyze the growth and profitability of our business and the performance of our management. Specifically, the use of core earnings (losses) provides a measure of the financial results of our business that is not impacted by the (1) adjustments to our revenues that are caused solely by externally driven changes in the market value of our credit swap portfolio or (2) immediate recognition of the full amount of gains from early terminated credit swaps included in our revenue. Because non-United States GAAP financial measures are not standardized, it may not be possible to compare core earnings (losses) with other companies' non-United States GAAP financial measures that have the same or similar names. The presentation of this supplemental information is not meant to be considered in isolation or as a substitute for net income (loss) or other measures of financial performance reported in accordance with United States GAAP. The reconciliation of core earnings (losses) to net income (loss) is set forth below. For additional information regarding this non-United States GAAP financial measures and an explanation of why we believe core earnings (losses) is a financial measure that is useful to management and investors, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Additional Financial Measures.".

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($ in thousands) Three Months Ended March 31, Year Ended December 31,
  2004 2003 2003 2002
             
Net United States GAAP income (loss) $ (8,349 $ 6,538   $ 78,471   $ (3,069
Add development stage expenses               4,292  
Add (less) change in fair value of credit swaps, excluding credit swaps purchased as short-term investments   14,924     (1,145   (46,716   213  
Less realized gains on terminated credit swaps sold   (1,173   (1,770   (18,313   (3,146
Add amortization of gains on terminated credit swaps sold   1,452     232     2,893     53  
             
Core earnings (losses) $ 6,854   $ 3,855   $ 16,335   $ (1,657
(2) Book value per share is based on total shareholders' equity divided by basic common shares outstanding. For years prior to 2001, the only shares issued were 12,000 common shares, par value $1.00 per share, issued to the founder. This total has not been adjusted for the reverse share split.
(3) Diluted book value per share is based on total shareholders' equity plus the assumed exercise of all dilutive options and warrants divided by diluted shares outstanding.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this prospectus. It contains forward-looking statements that involve risks and uncertainties. Please see "Special Note Regarding Forward-Looking Statements" for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the headings "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Overview

Our principal business is selling credit protection under which we assume the risk of default on investment grade credit obligations through our subsidiary, Primus Financial. Primus Financial has the highest counterparty credit ratings offered by S&P (AAA) and Moody's (Aaa) and is managed by an experienced team of professionals who have expertise in credit analysis, trading, risk management and market analysis.

In exchange for a fixed quarterly premium we agree, upon a payment default or other credit event (e.g., bankruptcy, moratorium or repudiation) affecting a Reference Entity, to pay a counterparty the notional amount for a specified debt obligation of the Reference Entity. Under these circumstances, the obligation is likely to have a market value of substantially less than par and we would incur an economic loss as a result. We monitor the credit swap market and the credit quality of individual Reference Entities on a continuous basis. If we believe there is an increased probability of a Reference Entity credit event, we may offset our risk through the purchase of credit swaps with respect to the specific Reference Entity or by terminating the related credit swaps we have sold. As of March 31, 2004, we had not suffered a credit event on any credit swap we have sold and our hedging transactions have been limited in scope. Further details are included in our discussion of operating results.

The market for credit swaps and, consequently, premium levels are affected by a number of factors, including defaults by Reference Entities, volatility in the capital markets, economic conditions, changes in interest rates and political uncertainties. During 2002, premium levels on credit swaps were generally high compared with historical averages. This presented us with an opportunity to sell credit swaps at attractive levels and by December 31, 2002, the notional amount of our outstanding portfolio of credit swaps was $4.6 billion. However, throughout 2003 there was a fairly steady decline in credit swap premium levels. The decline in premiums increased the fair value of our credit swap portfolio as the swaps we had written during 2002 and the early part of 2003 appreciated in value. During 2003, we slowed the pace of portfolio growth as the premium levels became less attractive relative to the risks borne. At December 31, 2003, Primus Financial had $6.4 billion (in notional amount) of credit swaps outstanding with a weighted average remaining life of 2.7 years. In the first quarter of 2004, we have seen a general increase in credit swap premium levels in the market. This has presented more attractive opportunities to sell credit swaps and we have increased the pace of portfolio growth in 2004. At March 31, 2004, Primus Financial had $8.1 billion of credit swaps outstanding with a weighted average remaining life of 2.6 years.

We expanded the range of our activities in 2003 to include the sale of Euro-denominated credit swaps, the purchase of credit swaps as short-term investments and the sale of financial guaranty insurance protection. We started selling Euro-denominated credit swaps in February 2003 and by March 31, 2004, Euro-denominated credit swaps comprised 21.6% of the notional amount of our credit swap portfolio. Toward the end of 2003, we also began to purchase credit swaps as short-term investments by buying credit swaps on selected Reference Entities at, we believe, relatively low credit swap premium levels with the expectation that the premium levels on these Reference Entities will rise. If the premium levels rise, we will be able to terminate the swaps at a gain. At March 31, 2004, we had purchased credit swaps as short-term investments on a notional principal amount of $125.0 million. We carry these credit swaps at fair value, using valuation techniques similar to those

25




used for the credit swaps we have sold. Additionally, in 2003 Primus Re issued its first financial guaranty protection on a total notional amount of obligations equaling $56.0 million.

Our net income is determined primarily by the growth in our credit swap portfolio, the premium levels at which the credit swaps are sold, our success in developing diversified sources of revenue and the expenses we incur. The growth in our portfolio depends on the growth in the overall market for credit swaps, coupled with our willingness and capacity to assume additional credit risk with respect to particular Reference Entities, industries and countries. Our pace of growth may also be affected by our ability to continue to attract and expand counterparty lines, which are influenced by our capital resources, our credit ratings and counterparty demand for credit protection.

Market premium levels are driven by a number of factors, including the number and size of market participants willing to buy and sell protection and the market's perception of future credit risks. The latter is in turn a function of macroeconomic factors such as the overall state of the economy, corporate profitability and financial leverage, and geopolitical consideration.

Our expenses have grown since we commenced business and we expect our expenses to continue to grow, both in order to implement our diversification strategy and as a result of additional costs of being a public company, such as additional reporting and governance requirements. We do not expect significant expense increases in the immediate future due to the expansion of our current lines of business.

Our net income is also significantly influenced by the periodic change in the fair value of our portfolio, based primarily on market premium levels at the time the portfolio is valued. We have experienced considerable volatility in market premium levels over time, and therefore we may experience considerable volatility in reported net income. We believe that the volatility of net income is not necessarily indicative of the underlying performance in meeting our business strategy and, for this reason, we are disclosing the supplementary performance measure which we call "core earnings".

We are in the preliminary stages of evaluating selling credit swaps referencing obligations of Reference Entities that are below investment grade and have not definitely determined whether we will sell such credit swaps. Accordingly, we do not know nor are we able to predict the timing, if any, of engaging in this activity or the impact selling credit swaps referencing obligations of entities that are below investment grade will have on our results of operations.

Revenues

We receive premium income from the credit swaps we sell. In general, premiums are received quarterly in arrears and accrued daily into income. In accordance with United States GAAP, we carry our credit swaps on our balance sheet at their fair value. Changes in the fair value of our credit swap portfolio are recorded as unrealized gains or losses in our consolidated income statement. Changes in the fair value of our credit swap portfolio are a function of the notional amount and composition of the portfolio and prevailing market credit swap premiums for comparable credit swaps. We generally hold the credit swaps we sell to maturity, at which point, assuming no credit event has occurred, the cumulative unrealized gains and losses on each credit swap would equal zero.

On occasion, and based on a number of factors, including prevailing market conditions, we terminate a credit swap that we have sold before the contractual maturity date. This is done through an agreed termination with our counterparty (an unwind) or through the assignment of our rights and obligations under the credit swap to a third party (an assignment). In general, we receive or pay a cash settlement in connection with the termination of the credit swap. The settlement amount is determined by negotiation with the counterparty or assignee party, based on prevailing market conditions at the time of the termination. The amounts we receive or pay for a termination are included as realized gains (losses) on credit swaps sold in the period in which the termination occurs.

We invest our cash in short term, high quality fixed income instruments. The yield on our investments is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. We invest in obligations of the United States of America

26




or direct obligations of United States agencies rated AAA and Aaa by S&P and Moody's, respectively, commercial paper rated A-1 and P-1 by S&P and Moody's, respectively, and money market funds.

When we purchase credit swaps as short-term investments, we incur the cost of paying premiums until we terminate the purchased protection. We undertake these transactions in the expectation that the market premium level for the Reference Entity will rise subsequent to our purchase of protection, but any gains upon termination may not suffice to offset the premium expense we have incurred while holding the purchased protection. Indeed, the market premium level for the Reference Entity may fall and we may incur termination losses as well as premium expense as a result. The fair value of our credit swaps purchased will be affected by credit swap premium levels.

Expenses

Our expenses are primarily employee compensation and other administrative expenses, including rent for our premises, professional fees and depreciation of our software and fixtures. Employee compensation expense includes salaries and benefits, cash bonuses and stock-based compensation, which is addressed further under "—Critical Accounting Policies". We expect to hire approximately five to seven people in professional positions during 2004, with a corresponding increase in employee compensation.

Distributions on Preferred Securities

Primus Financial has issued auction rate perpetual preferred securities that pay periodic distributions. The cost of these distributions is included in our income statement as distributions on preferred securities of a subsidiary. Further details of the nature and cost of these securities is included in our discussion of liquidity and capital resources. Over time, we expect to issue other debt and preferred securities, which will necessitate periodic interest payments and preferred distributions. Primus Financial is considering issuing up to $150.0 million of subordinated notes prior to the end of 2004.

Income Taxes

Primus Guaranty, Primus Barbados and Primus Financial are not expected to be engaged in the active conduct of a trade or business in the United States and as a result are not expected to be subject to United States federal, state or local income tax. Primus Asset Management is a United States domiciled corporation and is subject to United States federal, state and local income tax on its income, including on fees received from Primus Financial. Primus Re may be subject to United States federal, state or local income tax, or Primus Asset Management may be required to include all or part of Primus Re's income in calculating its liability for United States federal, state or local income tax, depending on the manner in which Primus Re conducts its business and the tax elections it makes. The maximum combined rate of United States corporate federal, state and local income tax that could apply to Primus Financial or Primus Barbados, were they found to be engaged in a United States business in New York City and subject to income tax, is approximately 46% (not including United States branch profits tax that would be imposed on Primus Barbados were Primus Financial deemed to be making distributions to Primus Barbados). See "Tax Considerations—Taxation of Primus Guaranty and its Subsidiaries—United States Taxation—Primus Guaranty, Primus Barbados and Primus Financial." For United States federal income tax purposes, Primus Guaranty and Primus Barbados are likely to be treated as passive foreign investment companies. For more information, please see "Tax Considerations."

Critical Accounting Policies

Valuation of Credit Swaps

From the inception of our business, we have applied Statement of Financial Accounting Standards, "Accounting for Derivative Instruments and Hedging Activities," or SFAS 133, which

27




established accounting and reporting standards for derivative instruments. SFAS 133 requires recognition of all credit swaps on the balance sheet at fair value. As a consequence of carrying our credit swaps at fair value, we are not permitted to record a reserve for anticipated losses due to credit events. The market premiums used to determine fair value generally take into account the expectation of such events. Changes in the fair value of our credit swap portfolio are included in our consolidated income statement as unrealized gains (losses) on credit swaps.

The fair value of the credit swaps depends on a number of factors, primarily Reference Entity credit swap premiums and interest rates. The credit swaps are valued using market-standard pricing models which calculate the net present value of differences between future premiums on currently quoted market credit swaps and the contractual future credit swap premiums on contracts we have undertaken. Our pricing model has been internally developed but is benchmarked against a market-standard model. Generally, our model uses quoted market credit swap premium data on individual Reference Entities that we purchase from an independent pricing service. This service takes pricing information from a number of prominent dealers and brokers in the credit swap market across a range of standard maturities and restructuring terms, and creates average market premium quotes on specific Reference Entities.

Credit swap premium levels are driven by a number of factors, including the number and size of market participants willing to buy and sell protection and the market's perception of future credit risks. The latter is in turn a function of macroeconomic factors such as the overall state of the economy, corporate profitability and financial leverage, geopolitical considerations and other factors. The premiums that Primus Financial receives in connection with its transactions are largely determined by market conditions affecting credit markets generally, and, particularly credit swap markets, both generally and with respect to particular Reference Entities. See "Business—Primus Financial—Transaction Pricing and Execution" for additional information.

A decline in credit swap premium levels generally causes an increase in the fair value of our credit swap portfolio which results in unrealized gains while an increase in premium levels causes a decrease in fair value of the credit swap portfolio resulting in unrealized losses. Throughout 2003, there was a fairly steady decline in credit swap premium levels, which contributed to our net unrealized gain of $46.7 million for the year ended December 31, 2003. However, during the first three months of 2004, credit swap premiums have generally increased which contributed to net unrealized loss of $14.5 million for the three months ended March 31, 2004.

Financial Guarantees

We have undertaken a limited amount of financial guarantee business through our subsidiary, Primus Re. Financial guarantees are insurance contracts that contingently require the guarantor to make payments to the guaranteed party. Primus Re designs its guarantee contracts to qualify as non-derivatives in accordance with the scope exception under paragraph 10d of SFAS 133 as amended by SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. We account for our financial guarantee contracts in accordance with SFAS No. 60 "Accounting and Reporting by Insurance Enterprises". This requires that premiums are deferred and recognized over the life of the contract and that losses are recorded in the period that they occur based on an estimate of the ultimate cost of losses incurred. Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. No policy acquisition costs have been deferred by us to date, as any such amounts have been immaterial.

Internal Use Software Costs and Formation Expenses

During our development stage (through March 13, 2002), we were developing our proprietary technology. The primary applications developed were (1) capital models to support Primus Financial's AAA/Aaa counterparty ratings and (2) a transactional platform to control our credit swap activities, ranging from trade administration to support for financial accounting and reporting.

The software and related costs of developing the capital model and control platform of approximately $12.4 million were capitalized in accordance with AICPA Statement of Position (SOP)

28




98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." These costs are being amortized over five years on a straight-line basis. Capitalized costs are reviewed periodically for impairment.

Stock-Based Employee Compensation Plans

Prior to 2003, we followed Accounting Principles Board, or APB, No. 25 "Accounting for Stock Issued to Employees". In 2003, we adopted the fair value approach on a prospective basis for recording stock-based employee compensation in accordance with the fair value method prescribed in SFAS 123 "Accounting for Stock-Based Compensation", as amended by SFAS 148 "Accounting for Stock-Based Compensation—Transition and Disclosure". Under these rules, compensation expense is recognized based on the fair value of stock options, restricted shares and restricted share units over the related vesting period. The fair value of the stock options granted is determined through the use of a market standard option-pricing model, which requires judgment as to appropriate volatility and interest rate factors. In the absence of a public market for our common shares, management and the board of directors estimate the market value of our common shares for all options, restricted share units and share issuances based on valuation opinions from independent valuation consultants.

Results of Operations for the Three Months Ended March 31, 2004 and 2003

Net income (loss) was $(8.3) million and $6.5 million for the three months ended March 31, 2004 and 2003, respectively. The results for these quarters are discussed below:

Net Premiums Earned

Net premiums earned were $9.6 million and $8.9 million for the three months ended March 31, 2004 and 2003, respectively. Net premiums earned include:

•  the accrued and received credit swap premium income on credit swaps sold,
•  premium expense for swaps purchased as short-term investments,
•  premium expense on credit swaps purchased to offset credit risk on certain credit swaps sold, and
•  brokerage expense.

The increase in net premiums earned was primarily driven by the increase in the portfolio of credit swaps sold in 2003 and 2004, slightly offset by the premiums paid for credit swaps purchased for short-term investment purposes in 2004 and an increase in brokerage expenses. The table below shows the component parts of net premiums earned for the three months ended March 31, 2004 and 2003.


($ in thousands) Three Months Ended March 31,
  2004 2003
Swap premium income on credit swaps sold $ 10,007   $ 9,144  
Swap premium expense on credit swaps
purchased as short-term investments
  (122    
Swap premium expense on credits purchased
to offset credit risk on certain swaps sold
  (23   (60
Brokerage expense   (218   (163
Total Net Premiums Earned $ 9,644   $ 8,921  

Premium income on credit swaps sold was higher for the three months ended March 31, 2004 primarily as a result of the expansion in our credit swap portfolio. The notional amounts outstanding of credit swaps we sold were $8.1 billion and $5.7 billion at March 31, 2004 and 2003, respectively.

The premium expense accrued on credit swaps purchased as short-term investments was $122,000 for the three months ended March 31, 2004. This activity commenced after the first quarter in 2003, and we therefore incurred no credit swap premium costs in the first quarter of 2003. At March 31, 2004, the credit swap notional amount outstanding on credit swaps purchased as short-term investments was $125 million.

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The notional amounts of credit swaps that we had purchased to offset credit risk on certain swaps sold were $5 million and $10 million at March 31, 2004 and 2003, respectively. The premium expense incurred as a result of our credit risk offset activity declined in the first three months of 2004 because the amount of credit risk offset transactions in place had declined in 2004.

As part of our credit swap purchase and sale activity, we use credit swap brokers on occasion to facilitate transactions. The brokerage expense incurred by Primus Financial was $218,000 and $163,000 in the quarters ending March 31, 2004 and 2003, respectively. The brokerage expense is recognized in the period in which the credit swaps are transacted.

Net Realized Gains (Losses) on Credit Swaps

Our business strategy is generally to hold credit swaps we sell until maturity. However, we may terminate selected credit swaps where we have sold protection prior to their scheduled maturity dates. The early termination of swaps enables us to reduce our risk with respect to selected Reference Entities and our exposure to our counterparties. If the swaps we terminate are at attractive market values, we are able to realize gains. Terminating transactions also allows us to accelerate premium receipts and provides for additional growth capacity within our credit swap portfolio. We terminated $153 million and $78 million notional amount of credit swaps sold during the three months ended March 31, 2004 and 2003, respectively. Where we have purchased protection as a short-term investment, early termination of the credit swaps is a fundamental part of the business strategy. We terminated $74 million notional amount of credit swaps purchased in the three months ended March 31, 2004. The purchase of protection as a short-term investment was commenced after March 31, 2003 and therefore no terminations took place in the quarter ended on that date.

Net realized gains on the early termination of credit swaps were $1.6 million and $1.6 million in the three months ended March 31, 2004 and 2003, respectively. Net realized gains for the three months ended March 31, 2004 and 2003 are summarized below:


($ in thousands) Three Months Ended March 31,
  2004 2003
Net realized gains on terminated credit swaps sold $ 1,161   $ 1,556  
Net realized gains on terminated credit swaps
purchased as short-term investments
  421      
Total Realized Gains on Credit Swaps $ 1,582   $ 1,556  

Net Unrealized Gains (Losses) on Credit Swaps

Net unrealized gains (losses) on credit swaps were ($14.5 million) for the three months ended March 31, 2004 and $1.1 million for the three months ended March 31, 2003. The change in unrealized gains (losses) on credit swaps reflects the change in the fair value of our credit swap portfolio and is primarily due to the increase in market credit swap premium levels experienced during the first three months of 2004. (See "Risk Factors—Risks Related to our Business—Variations in credit swap premiums could cause our earnings to be inconsistent and our share price to fluctuate significantly.") The unrealized gains (losses) on credit swaps sold and credit swaps purchased as short-term investments and for credit risk offset purposes for the three months ended March 31, 2004 and 2003 are summarized below:

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($ in thousands) Three Months Ended March 31,
  2004 2003
Net unrealized gains (losses) on credit swaps sold $ (14,964 $ 1,736  
Net unrealized gains on credit swaps purchased
as short-term investments
  450      
Net unrealized gains (losses) on credit swaps purchased
to offset credit risk on certain credit swaps sold
  40     (591
Net total Unrealized Gains (Losses) on Credit Swaps $ (14,474 $ 1,145  

Interest Income Earned

We had interest income of $652,000 and $672,000 in the three months ended March 31, 2004 and 2003, respectively. The decrease in the interest income is attributable to the lower investment yields for cash equivalents and short-term investments in the first three months of 2004, compared with yields in 2003. Average yields on the cash equivalent and short-term investments were 1.0% in the first three months of 2004 and 1.2% in the first three months of 2003, primarily due to a general decline in market interest rates over these periods. The decline in yields was somewhat mitigated by the increase in funds available for investment in the first three months of 2004, compared with the first three months of 2003. Our cash, cash equivalents and short-term investments were approximately $264.2 million and $224.5 million as of March 31, 2004 and 2003, respectively.

Operating Expenses

Our operating expenses were $5.1 million, and $5.4 million for the three months ending March 31, 2004 and 2003, respectively. Operating expenses for these years are summarized below:


($ in thousands) Three Months Ended March 31,
  2004 2003
Employee compensation $ 3,423   $ 2,417  
Excess-of-loss insurance premium       727  
Administrative expenses   1,682     2,281  
Total Operating Expenses $ 5,105   $ 5,425  
Number of full-time employees   29     23  

The increase in employee compensation over these periods was primarily due to the increase in the number of employees as the business expanded its operations coupled with an increase in the levels of compensation. The excess-of-loss insurance premium expense relates to a surety policy to cover excess credit losses, which Primus Financial acquired in March 2002 and terminated in March 2003. Administration expenses include professional fees, banking and rating agency charges and amortization and depreciation expenses. Amortization and depreciation principally relates to the amortization of our internally developed software and the depreciation of our furniture and fixtures. Software amortization decreased by approximately $200,000 in the first three months of 2004, compared with the first quarter of 2003 as a result of the write-off of previously capitalized software that was no longer in active use by the company during 2003.

Income Taxes

Provisions for income taxes were $72,000 and $137,000 for the three months ended March 31, 2004 and 2003, respectively. As previously discussed, it is expected that only the income of Primus Asset Management and its subsidiary, Primus Re, are likely to be subject to United States federal, state and local income taxes. For more information, please see "Tax Considerations."

Net Income (Loss)

We had net income (loss) of ($8.3 million) and $6.5 million in the three months ended March 31, 2004 and 2003 respectively. The decrease in net income in the quarter ended March 31, 2004 was

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primarily driven by the depreciation in the value of the credit swap portfolio in that period as market credit swap premium levels increased.

Results of Operations for the Years Ended December 31, 2003, 2002 and 2001

We were capitalized in March 2002 and started selling credit swaps in June 2002. Prior to March 2002, the company incurred development stage expenses, which are discussed further below. Since we were a development stage company prior to March 2002, comparisons of those periods to later periods are not relevant.

Net Premiums Earned

Net premiums earned were $38.5 million and $11.8 million in the years ended December 31, 2003 and 2002, respectively. Net premiums earned include:

•  the accrued and received credit swap premium income on credit swaps sold,
•  premium expense for swaps purchased as short-term investments,
•  premium expense on credit swaps purchased to offset credit risk on certain credit swaps sold, and
•  brokerage expense.

Credit swaps that we sold in 2002 generated $28.5 million of the net premiums earned for the year ended December 31, 2003, as a full year's premiums were earned on those credit swaps and only a partial year of premiums was earned on the credit swaps we sold throughout 2003. The table below shows the component parts of net premiums earned for the years ended December 31, 2003 and 2002.


($ in thousands) Year Ended December 31,
  2003 2002
Swap premium income on credit swaps sold $ 39,112   $ 12,155  
Swap premium expense on credit swaps purchased as short-term investments   (19    
Swap premium expense on credit swaps purchased to offset credit risks on certain credit swaps sold   (135   (24
Brokerage expense   (442   (363
Total Net Premiums Earned $ 38,516   $ 11,768  

The notional amounts outstanding of credit swaps we sold were $6.4 billion and $4.6 billion at December 31, 2003 and 2002, respectively. Premium income on credit swaps sold grew in 2003 as a result of the expansion in our credit swap portfolio and because premium income was only earned for a portion of 2002 as our credit swap activity began in June 2002.

The premium expense accrued on credit swaps purchased as short-term investments was $19,000 in the year ended December 31, 2003. This activity was new in 2003, and we therefore incurred no credit swap premium costs in 2002. At December 31, 2003, the credit swap notional amount outstanding on credit swaps purchased as short-term investments was $130.0 million.

The notional amounts of credit swaps that we had purchased for credit risk offset purposes were $5.0 million and $10.0 million at December 31, 2003 and 2002, respectively. The premium expense incurred as a result of our credit risk offset activity rose in 2003 because we had credit risk offset transactions in place for only a portion of 2002, whereas we had credit risk offset transactions in place throughout 2003.

As part of our credit swap purchase and sale activity, we use credit swap brokers on occasion to facilitate transactions. The brokerage expense incurred by Primus Financial was $442,000 and $363,000 in the years ending December 31, 2003 and 2002, respectively. The brokerage expense is recognized in the period in which the credit swaps are transacted.

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Net Realized Gains (Losses) on Credit Swaps

Although our business strategy is generally to hold credit swaps we sell until maturity, during 2002 we began terminating selected credit swaps in our portfolio. At a time when credit swaps that we had previously sold had attractive market values, we were able to reduce our risk with respect to selected Reference Entities and our exposure to our counterparties by terminating certain credit swaps, which resulted in realized gains. Terminating transactions also allows us to accelerate premium receipts and provides for additional growth capacity within our credit swap portfolio. We terminated $977.0 million and $130.0 million of credit swaps sold during the years ended December 31, 2003 and 2002, respectively. Net realized gains on the early termination of credit swaps were $17.6 million and $2.8 million in the years ended December 31, 2003 and 2002, respectively. Net realized gains increased from 2002 to 2003 as a result of an increased volume of early terminations and because the general increase in the fair value of credit swaps in 2003 enabled us to terminate transactions at higher gains. As of December 31, 2003, we had not incurred a credit event on any credit swap we had sold.

Net realized gains (losses) for the years ended December 31, 2003 and 2002 are summarized below:


($ in thousands) Year Ended December 31,
  2003 2002
Net realized gains on terminated credit swaps sold $ 18,049   $ 2,843  
Net realized gains on terminated credit swaps purchased as short-term investments   28      
Net realized losses on terminated credit swaps purchased to offset credit risks on certain credit swaps sold   (448    
Total Realized Gains on Credit Swaps $ 17,629   $ 2,843  

Net Unrealized Gains (Losses) on Credit Swaps

Net unrealized gains on credit swaps were $46.7 million for the year ended December 31, 2003, compared with a loss of $213,000 for the year ended December 31, 2002. The increase in unrealized gains on credit swaps reflects the change in the fair value of our credit swap portfolio and is primarily due to the reduction in market credit swap premium levels experienced during 2003. (See "Risk Factors—Risks Related to our Business—Variations in credit swap premiums could cause our earnings to be inconsistent and our stock price to fluctuate significantly.") The unrealized gains on credit swaps sold and credit swaps purchased as short-term investments and for credit risk offset purposes for the years ended December 31, 2003 and 2002 are summarized below:


($ in thousands) Year Ended December 31,
  2003 2002
Net unrealized gains on credit swaps sold $ 46,663   $ 105  
Net unrealized gains on credit swaps purchased as short-term investments   23      
Net unrealized gains (losses) on credit swaps purchased to offset the credit risk on certain credit swaps sold   53     (318
Net total Unrealized Gains (Losses) on Credit Swaps $ 46,739   $ (213

Interest Income Earned

The company had interest income of $2.6 million, $1.6 million and $2,000 in the years ended December 31, 2003, 2002 and 2001, respectively. The increase in the interest income is attributable to the growth in the balances of cash equivalents and short-term investments during these periods. The average yields on the cash equivalent and short-term investments fell from 2.9% in 2001 to 1.3% in 2002 and to 1.1% in 2003, which reflects a general decrease in market interest rates over these periods.

Our cash, cash equivalents and short-term investments were approximately $261.9 million, $221.0 million and $136,000 as of December 31, 2003, 2002 and 2001, respectively.

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Operating Expenses

Our operating expenses were $25.5 million, and $18.8 million for the years ending December 31, 2003 and December 31, 2002, respectively. Operating expenses for these years are summarized below:


($ in thousands) Year Ended December 31,
  2003 2002
Employee compensation $ 11,701   $ 6,428  
Excess-of-loss insurance premium   727     1,854  
Administrative expenses   13,027     6,261  
Development stage expenses       4,292  
Total Operating Expenses $ 25,455   $ 18,835  
Number of full-time employees   29     19  

The increase in employee compensation over these periods was primarily due to the increase in the number of employees as the business expanded its operations. The excess-of-loss insurance premium expense relates to a surety policy to cover excess credit losses, which Primus Financial acquired in March 2002 and terminated in March 2003. Administration expenses include professional fees, banking and rating agency charges and amortization and depreciation expenses. Amortization and depreciation principally relates to the amortization of our internally developed software and the depreciation of our furniture and fixtures. Software amortization increased by approximately $3.2 million in 2003 as a result of the write-off of previously capitalized software that was no longer in active use by the company. The 2002 amount discussed above includes $4.3 million of development stage expenses are discussed below.

Development Stage Expenses

From 1998 to March 13, 2002, the company was engaged in creating its operating technology platform, raising capital and establishing the basis for its AAA/Aaa counterparty credit ratings. The company primarily incurred employee compensation, administrative and software development expenses. During this period, we were funded by external sources (see "—Liquidity and Capital Resources"). Development-stage expenses were $4.3 million in 2002, $2.8 million in 2001, $3.1 million in 2000 and $1.0 million in 1999. These expenses included $3.5 million in salaries and benefits, $2.2 million in legal fees, $2.9 million in professional fees, $733 thousand in technology and data feeds and $1.8 million of all other expenses. The $11.1 million total includes expense items incurred in the years 1998, 1999 and 2000 totaling $207 thousand, $1.0 million and $2.8 million, respectively. The total expense amount from those years equals $4.0 million.

Income Taxes

Benefits (provisions) for income taxes were $172,000 and ($254,000) for the years ending December 31, 2003 and 2002, respectively. Primus Guaranty had a gross deferred tax asset fully offset by a valuation allowance of $5.1 million and $4.9 million as of December 31, 2003 and 2002, respectively. The change in the deferred tax asset and valuation allowance between 2002 and 2003 results from Primus Asset Management's estimated net operating loss. As previously discussed, it is expected that only the income of Primus Asset Management and its subsidiary, Primus Re, are likely to be subject to United States federal, state and local income taxes. However, were Primus Barbados subject to income tax at a combined United States federal, New York State and New York City income tax rate of 46% on its United States GAAP income, then its income tax expense (excluding interest and penalties) would be approximately $36 million for 2003 and $80,000 for 2002. These figures assume that Primus Financial is not deemed to be making distributions to Primus Barbados, which distributions would subject Primus Barbados to the United States federal branch profits tax. For more information, please see "Tax Considerations."

Net Income (Loss)

We had net income (loss) of $78.5 million, ($3.1 million) and ($2.8 million) in the years ended December 31, 2003, 2002 and 2001 respectively. The increase in net income in 2003 was driven by the growth in our credit swap portfolio, coupled with the appreciation in its value.

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Contractual Obligations

Primus Financial has leased its premises at 360 Madison Avenue, New York, New York from Madison 45 LLC at a fixed yearly rental (subject to certain escalations specified in the lease) until August 1, 2012. There are no material restrictions imposed by the lease agreement. The lease is categorized as an operating lease and future payments under the lease are as follows:


Contractual Obligations Payment due by period
  Total Less than 1 year 1-3 years 3-5 years More than 5 years
                               
Property Lease $ 6,481,475   $ 720,495   $ 1,494,580   $ 1,512,444   $ 2,753,956  

We have no other material long-term contractual obligations.

Liquidity and Capital Resources

Prior to commencement of operations (March 14, 2002), we were provided advances by Jay H. Shidler, a shareholder who continues to be a shareholder and director of Primus Guaranty. These advances were primarily to pay operating expenses prior to the commencement of operations. The shareholder was subsequently reimbursed for the advances. See "Certain Relationships and Related Transactions". On the commencement date, we were capitalized with $155.0 million from the issuance of convertible voting preferred shares to two subsidiaries of XL Capital Ltd, or XL, Transamerica Life Insurance Company, a subsidiary of AEGON USA, Pacific Corporate Group/CalPERS and Radian Group Inc., or Radian. Concurrently with that issuance, Primus Financial obtained a $115.0 million excess-of-loss insurance policy from Radian Reinsurance, Inc. The policy was provided to cover credit losses in excess of Primus Financial's cash capital. Primus Financial terminated this policy in March 2003.

Primus Financial issued $110.0 million of PFP Cumulative Preferred Stock on December 19, 2002 in two series, Series I and Series II, to a trust. In conjunction with the receipt of the securities, the trust issued $100.0 million of Money Market Preferred Securities Custodial Receipts, or MMP Receipts, in two series, Series A and Series B, to various institutional investors in a private placement. The trust also issued $10.0 million of Variable Inverse Preferred Securities Custodial Receipts that were retained by Primus Financial. One series pays distributions every 28 days based on an auction rate set on the prior business day and the other series makes payments quarterly, based on an auction rate, which is currently set annually. After December 19, 2012, Primus Financial may redeem the securities, in whole or in part, on any distribution date at $1,000 per share plus accumulated and unpaid dividends. However, Primus Financial is not required to redeem the securities, nor is it required to establish a sinking fund. For the year ended December 31, 2003, Primus Financial made net distributions to the trust's MMP Receipts in an amount equal to $1.9 million.

Additionally, as required by our operating guidelines, Primus Financial maintains a $37.5 million liquidity facility with Harris Trust and Savings Bank, or Harris Trust. The purpose of the liquidity facility is to provide Primus Financial with cash in the event it is obligated to purchase a Reference Entity's debt obligation as the result of a credit event and could not liquidate its investments to do so on a timely basis. The liquidity facility requires that Primus Financial have United States government securities available to pledge as collateral on any advances made under the facility. The facility is renewable on an annual basis at the option of Primus Financial or Harris Trust and has been extended through March 2005. There have been no credit events to date and there have been no borrowings under the facility.

We receive cash from the receipt of credit swap premiums, the net proceeds from the early termination of credit swaps, interest income earned on our investment portfolio and capital raising activities. Cash has been used to pay our operating expenses, administrative expenses, premiums on credit swaps we have purchased and preferred share distributions.

Primus Financial, in order to support its AAA/Aaa ratings, is required to maintain capital in an amount determined by the capital models it has agreed upon with S&P and Moody's. The capital

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required is primarily a function of its credit swap portfolio characteristics, Primus Financial's operating expenses and its tax position. Ernst & Young LLP performs weekly agreed upon procedures to assist Primus Financial in evaluating compliance with its operating guidelines. Retained cash flow and proceeds from financings are utilized to increase our capital resources to support our credit swap business.

With our current capital resources and anticipated future credit swap premium receipts and interest income, we believe we have sufficient liquidity to pay our operating expenses and preferred distributions over at least the next twelve months.

Our cash, cash equivalents and short-term investments were approximately $264.2 million and $224.5 million as of March 31, 2004 and 2003, respectively. Cash flows provided by (used in) operating activities, investing activities and financing activities were $17.4 million and $3.5 million, respectively, for the quarters ended March 31, 2004 and 2003, respectively.

Our cash, cash equivalents and short-term investments were approximately $261.9 million, $221.0 million and $136,000 as of December 31, 2003, 2002 and 2001, respectively. Cash flows provided by (used in) operating activities, investing activities and financing activities were $36.9 million, $220.8 million and $2,000, respectively, for the years ended December 31, 2003, 2002 and 2001.

Primus Financial is contemplating the issuance of up to $150 million of subordinated notes prior to the end of 2004. The effect of this issuance would be to increase the capital resources of Primus Financial under its operating guidelines, which would facilitate the expansion of our credit swap activity. The net proceeds would be invested in accordance with our investment guidelines. Given that the interest rate for the notes will be reset periodically, we anticipate that the interest cost of the debt, net of interest income on the invested proceeds, would be less than 0.50% per annum in normal circumstances.

We expect that the proceeds of this offering will permit us to continue to implement our business strategy. We expect our existing capital base and the associated earnings, along with up to $60.0 million of the proceeds of this offering and additional debt financing by Primus Financial, including the contemplated subordinated note issuance described above, will be sufficient to operate our business. However, there can be no assurance that we will not need to raise additional capital in the future.

Additional Financial Measures

The presentation of this supplemental information is not meant to be considered in isolation or as a substitute for other measures of financial performance reported in accordance with United States GAAP. This non-United States GAAP financial measure reflects an additional and helpful way of viewing aspects of our operations that, when viewed with our United States GAAP results and the reconciliations set forth below to corresponding United States GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

"Core" earnings (losses) is not a financial measure recognized under United States GAAP. United States GAAP requires us to carry our credit swap portfolio at fair value, which produces significant changes in our net income as the market values of our credit swaps fluctuate, and it also requires us immediately to recognize realized gains or losses related to terminations of credit swaps sold prior to maturity. Net income, as computed for United States GAAP purposes, is adjusted to arrive at our core earnings (losses). The adjustments we make are summarized below:

(1)  Gains or losses based on marking to market our portfolio of credit swaps are excluded from net income, except for credit swaps purchased pursuant to our short-term investment strategy;
(2)  Any realized gains from terminations of credit swaps sold prior to maturity are amortized over the remaining original life of the contracts that were terminated, except for credit swaps purchased pursuant to our short-term investment strategy; and
(3)  Any non-recurring development stage expenses incurred during our developmental stage until March 14, 2002 are excluded.

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The United States GAAP financial measure most directly comparable to core earnings (losses) is net income (loss). Some of the significant limitations associated with the use of core earnings (losses) as compared to net income (loss) are that core earnings (losses) does not consider gains or losses resulting from the changes in the fair value of credit swaps sold. Core earnings (losses) also disregards the impact on our results of operations of items that management believes are not characteristic of our underlying business operations.

We believe "core earnings (losses)" provides our board of directors, management and investors a helpful way to analyze the growth and profitability of our business and the performance of our management. Our board also takes these measures into account in evaluating the contribution made by our management and key employees and in determining their compensation. Specifically, the use of core earnings (losses) provides a measure of the financial results of our business that is not impacted by the adjustments to our revenues (and, ultimately, our net income) that are caused solely by externally driven changes in the market value of our credit swap portfolio, which tend to obscure both negative and positive developments in our business.

We believe that using core earnings as a measure of performance is appropriate because our business strategy is normally to hold the credit swaps we sell to their maturity, with the result that period-to-period changes in their value have no ultimate effect on our business or our performance. We dispose of credit swaps prior to maturity only in exceptional circumstances where we believe that: (1) the underlying risk has increased to a point exceeding our risk tolerance or (2) an unusual combination of market conditions and capacity considerations make it advisable to engage in a reduction in the overall size of our portfolio. In those limited instances when we terminate a swap prior to its maturity, we reflect in core earnings (losses) the amortization of the realized gain over the original remaining life of the terminated credit swap. Under United States GAAP, the full amount of such gains is included in our revenue immediately. Both under United States GAAP and in our calculation of core earnings (losses), the full amount of any losses on termination of swaps is reflected in revenue immediately. We believe that this presentation is helpful in analyzing our performance because it is consistent with our policy of generally holding credit swaps we sell to their maturity.

We distinguish the credit swaps where protection has been purchased as a short-term investment and continue to recognize unrealized gains (losses) on these transactions as they are undertaken for short-term investment purposes, for which unrealized gains (losses) income recognition is appropriate.

We also exclude from core earnings (losses) charges that were incurred during our developmental stage, which ran from inception to March 14, 2002. During that early period, we had no active business operations and our resources were limited to minor amounts of investment income. We have been out of our development stage for over two years and do not anticipate re-entering that stage again. Accordingly, we have excluded our development stages expenses from our calculation of core earnings (losses) for 2002 as not relevant to an analysis of our performance since we commenced operations.

Because non-United States GAAP financial measures are not standardized, it may not be possible to compare core earnings (losses) with other companies' non-United States GAAP financial measures that have the same or similar names. This presentation of core earnings (losses) is not meant to be considered in isolation or as a substitute for net income (loss) or other measures of financial performance reported in accordance with United States GAAP.

Core earnings (losses) for the quarters ending March 31, 2004 and March 31, 2003

Net income, as computed for United States GAAP purposes, is adjusted to arrive at our core earnings (losses). The reconciliation of United States GAAP net income to core earnings (losses) for the three months ended March 31, 2004 and March 31, 2003 is shown below:

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($ in thousands) Three Months Ended
March 31,
  2004 2003
Net United States GAAP income (loss) $ (8,349 $ 6,538  
Add (less) change in fair value of credit swaps, excluding credit swaps purchased as short-term investments   14,924     (1,145
Less realized gains on terminated credit swaps sold   (1,173   (1,770
Add amortization of gains on terminated credit swaps sold   1,452     232  
Core earnings (losses) $ 6,854   $ 3,855  

Realized gains and losses from the early termination of credit swaps for the three months ended March 31, 2004 and 2003 were as follows:


($ in thousands) Three Months Ended
March 31,
  2004 2003
Realized gains on terminated credit swaps sold $ 1,173   $ 1,770  
Realized losses on terminated credit swaps sold   (12   (214
Net realized gains on terminated credit swaps sold $ 1,161   $ 1,556  
Realized gains on terminated credit swaps
purchased as short-term investments
  421      
Total realized gains (losses) on credit swaps $ 1,582   $ 1,556  

Realized gains from the early termination of the credit swaps sold are amortized over the remaining life of the terminated contracts and as amortized as follows for core earnings (losses) computations:


($ in thousands) Three Months Ended
March 31,
2004
Amount of amortized gain recognized in:  
2002 $ 0  
2003   0  
2004   426  
2005   269  
2006   269  
2007   190  
2008   19  
Total amortized gain recognized $ 1,173  

Core earnings (losses) for the years ended December 31, 2003 and December 31, 2002

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Net income, as computed for United States GAAP purposes, is adjusted to arrive at our core earnings. The reconciliation of United States GAAP net income to core earnings (losses) for the years ended December 31, 2003 and December 31, 2002 is shown below:


($ in thousands) Year Ended December 31,
  2003 2002
Net United States GAAP income (loss) $ 78,471   $ (3,069
Add development stage expenses       4,292  
Add (less) change in fair value of credit swaps, excluding credit swaps purchased as short-term investments   (46,716